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January 27, 2011

Are American Workers Better Off Than They Were Forty Years Ago?

Are American workers richer than they were forty years ago?

There is some debate about that . . .

  • The overall price of goods went up due to high inflation in the 1970’s and lower but steady inflation ever since
  • The cost of government-subsidized college education is MUCH higher, adjusted for inflation
  • Health care is much more advanced, but also, thanks to government controls and subsidies, much more expensive
  • The stability of oil prices prior to Nixon’s 1971 abandonment of the gold standard, gave way to severe oil shocks
  • People who remember “what it was like” seem to recall better craftsmanship, better customer service, more enjoyable airline flights, etc.

Perhaps of greatest concern, economist Tyler Cowen argues that we are in a “Great Stagnation.” Although there has been progress, real median incomes have stagnated since 1973, and the rate of new products has been steadily declining since 1870-1950.

Economist Russ Roberts disagrees:

It is not just a question of the number of new goods and services–it is the pace of innovation within product categories and how much each of these makes it hard to measure prices with any accuracy. So it is not just that we now have televisions that we didn’t have before. It’s the speed at which new television models are introduced and the pace of the improvement of those new models. The 1946-1973 period surely introduced some new products. But my perception is that the pace of innovation was quite slow relative to today.

Roberts then references the rapid evolution of the iPod, but the same could be said of other gadgets. It appears impossible to quantify, in dollar terms, the drastic increases in quality of life in at least some areas. For instance, you may now access an historical document within a few keystrokes not have to consume a chunk out of your day to visit a major library. Thanks to cell phones, an accident on a country road can lead to a speedy rescue and lives saved.

Stephen Horwitz writes in The Philadelphia Inquirer that “simply measuring income and wealth tells us very little about the lifestyle of typical Americans. For example, poor Americans today are more likely to own basic household goods – such as washing machines, dishwashers, televisions, refrigerators, and toasters – than average Americans were in 1973.”

Last month, economist M.J. Perry blogged about the price of a television in 1964:

Bottom Line:  For a consumer or household spending $750 in 1964, all they would have been able to afford was a console color TV from the Sears Christmas catalog.  A consumer or household spending that same amount of inflation-adjusted dollars today ($5,300) would be able to furnish their entire kitchen with 8 brand-new appliances (refrigerator, freezer, dishwasher, range, washer, dryer, microwave and blender) and buy 9 state-of-the-art electronic items (laptop, GPS, camera, home theater, plasma HDTV, iPod Touch, Blu-ray player, 300-CD changer and a Tivo recorder).  And of course, even a billionaire in 1964 wouldn’t have been able to purchase many of the items that even a teenager can afford today, e.g. laptop, GPS, digital camera.

A couple of days later, Perry explored the same idea based on the number of hours it took an average hourly wage earner to earn enough money to buy a good. In 1966 an oven cost an average wage earner 121.3 hours of work. With that amount of work, the average wage earner in 2010 could purchase “a high-efficiency front-loading washing machine, super capacity gas dryer, 30-inch gas stove, 8.8 cubic feet chest freezer, 16.5 cubic foot refrigerator, dishwasher, mid-size microwave and blender.”

Perry concludes:

Measured by what is ultimately most important, the value of our time, household appliances keep getting cheaper and cheaper, thanks to innovation, technology improvements, supply chain efficiencies, increases in productivity and other market-driven efficiencies that drive prices lower and lower year by year. As much as we hear about declines in median income, economic stagnation, the disappearance of the middle class, falling real wages, increasing income inequality, the data tell a much different story: The rich are getting richer and the poor are getting richer.

And life has been improved in ways we take for granted. A few years ago, Malcolm Gladwell pointed out a subtler form in which everyone is getting “richer” and happier in a TED talk:

Not only are there dozens more varieties of spaghetti sauce today than 30-40 years ago, countless other foods come in with more flavor options. Soaps and detergents come with more scent options. Today, the marketplace caters to the personal tastes even of people on the lowest rung of the economic ladder.

Central government planning didn’t make this happen. Companies found out what their customers liked, and gave it to them.

I do believe that Cowen’s concerns are legitimate. There are areas in life in which there seems to be stagnation rather than growth. Taxation, regulation, inflation, and waste have distorted markets, created mal-investment, and made life less well-off than it could have been.

And yet, despite government intervention, life is better today than ever.

Imagine how good it would be WITHOUT government intervention?

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